Funding; Annuity Factor to be used

[JAY21]

Assuming the valuation has the assumption that the expected benefit form is a lump sum distribution then the annuity factor used to develop the Fdg Target and TNC should then be the GREATER of (a) 417e factor or (b) actuarial equivalence (if different), is that correct ? I realize the discount will use the 430 segment rates but I'm just concerned with the annuity factor itself. Thanks.

[Andy the Actuary]

Agreed.

[My 2 cents]

Agreed, with my understanding being that the 417(e) factor is calculated as though the funding segment rates were the applicable rates to be used for 417(e) purposes. If the plan only uses 417(e) as the lump sum basis, there is almost no difference between assuming payment as a lump sum and assuming payment as an annuity (provided that there is no major skewing between the use of sex-distinct mortality for funding and unisex mortality for calculating the "expected" lump sum amounts).

[Guest Jcarolan]

Let me throw out an example, and let me know what you think.

The regs seem to require an annuity substitution method of the 417(e) rates for the lump sum at retirement, but requires the 430(h) segment rates to discount from retirement to the val date.

For example, an participant who is 18 years from retirement, and 100% assumed to take a lump sum, will have their APR at retirement by using 2 years of the second 417(e) segment rate and the third 417(e) segment rate for all other years, then will be discounted back for 18 years at the second 430(h) segment rate.

[ScottR]

Correct. It's essentially the same as if you were valuing a deferred annuity, but using 417e mortality instead of 430 funding mortality.

... Scott

[SoCalActuary]

ScottR - did you look at the response from JCarolan about the 2nd & 3rd segment rates?

JC was indicating that the annuity value at year 18 would be computed using the 417(e) mortality (I agree), and the 417(e) interest rates (which contradicts your comment).

[ScottR]

I don't think there's any disagreement. If we're valuing a deferred annuity, starting 18 years hence, the discounting from benefit commencement date would be based on the second segment rate. And the APR at retirement would be based on 2 years at the 2nd segment rate and the remainder at the 3rd segment rate.

Where do you see a contradiction?

.. Scott

[SoCalActuary]

I don't think there's any disagreement. If we're valuing a deferred annuity, starting 18 years hence, the discounting from benefit commencement date would be based on the second segment rate. And the APR at retirement would be based on 2 years at the 2nd segment rate and the remainder at the 3rd segment rate.

Where do you see a contradiction?

.. Scott

Which segment rate are you considering for valuation of the lump sum? The 417(e) rate differs from the 430 rate.

My understanding is that the deferred payments are valued on the 430 rate. JC stated use of the 417 rate.

The mortality is the 417 mortality, not the 430 mortality. But the segment rates are 430.

[Draper55]

I don't think there's any disagreement. If we're valuing a deferred annuity, starting 18 years hence, the discounting from benefit commencement date would be based on the second segment rate. And the APR at retirement would be based on 2 years at the 2nd segment rate and the remainder at the 3rd segment rate.

Where do you see a contradiction?

.. Scott

Which segment rate are you considering for valuation of the lump sum? The 417(e) rate differs from the 430 rate.

My understanding is that the deferred payments are valued on the 430 rate. JC stated use of the 417 rate.

The mortality is the 417 mortality, not the 430 mortality. But the segment rates are 430.

I agree that you use the 430 rates and 417(e) mortality. this is clear. it is not clear precisely how one

reflects a plan actuarial equivalent rate(s) that may produce a larger benefit than the 417(e) rates. Suppose the

lump sum plan rate is 5.5%. does one perform the valuation using 5.5% and see if this produces a greater result than the 430 rates in the aggregate or by indivual life?? Further, if you do not use the 430 rates then how do you complete the

scetion of the SB asking for your interest rates???

[My 2 cents]

My understanding is that if the plan provides for lump sums based on 5.5%, it must provide that the result be no less than what one gets using 417(e) rates. For funding purposes, one should calculate both (with the segment or yield curve rates substituted for the 417(e) rates) and use the greater amount.